Shareholders attempt to change environmental, social, and governance (ESG) practices and policies of the firms they invest in by establishing a long-term relationship called shareholder engagement. They are important for fostering sustainable development, managing risks, attracting investors, gaining a competitive edge, engaging stakeholders, complying with regulations, and creating long-term value for companies and society.
According to Irene Beccarini, researcher professor at EMLV, shareholder engagement is initiated by shareholders with a formal expression of a concern in a written letter; typically continues with the filing of a formal resolution or proposal to be voted by all investors at annual company meetings; advances through private dialogue between shareholders and corporate executives; and leads to concrete changes thanks to a wise articulation of conflict and collaboration at different stages of the process.
An opinion piece was published in FNEGE media. You can watch it here.
Driving Sustainable Change
Shareholder engagement is the long-term relationship that shareholders developed with the firms they invest in. The final objective is to change policies and practices that are in place that invested firms in making them more sustainable, especially those policies and practices that impact the environment or local communities or the society at large and internally on the government of the firm and the workforce.
Those are also known as the ESG – Environmental, Social, and governance factors. In their long-term relationships with firms, shareholders use a variety of tactics such as writing letters, shareholder proposals, and private dialogue.
The process generally starts when shareholders formally express an ESG concern, and they do so in a written letter. If, after the letter, the company doesn’t take any action.
Then shareholders file formal shareholder resolutions in which they ask for a change, and they submitted to all investors so that they can vote on it at firm’s CGN’s annual general meetings.
After these formal proposals, funds generally accept to enter into dialog with concerned shareholders, and eventually, over time they might get to an agreement and implement some concrete change.
Research shows that shareholder engagement is effective in creating changes. It has positive consequences on the shareholder value of engaged firms.
Making private dialogue effective
And so the central question becomes how to make private dialogue effective. Two are the conditions.
- Firstly, accounting conflict to earlier stages of the engagement process before shareholders and firms’ executives developed together a solution to this specific ESG issue of concern.
- Second, both parties need to maintain a collaborative attitude throughout the entire engagement process. By sharing relevant information, listening to the other party, and providing reasons for their positions.
Promoting sustainable and responsible business practices
The path to success in ESG practices is by evaluating a company’s environmental impact, social responsibility, and governance structure, recognizing the interconnectedness of financial performance and societal well-being.
Entering the era of Principles for Responsible Investing
Respecting different views and remaining open to change their minds under these conditions, changes in ESG policies and practices that are satisfactory to both shareholders and firms will be smoothly and effectively implemented for the benefit of all shareholders and society at Large shareholder engagement is growing exponentially, and this is partially due to the growth of responsible investment.
Asset owners and asset managers are increasingly signing up for the United Nations-sponsored Principles for Responsible Investing, also known as PRI.
And they commit to be active owners by starting an internal engagement team or collaborating with specialized asset managers. Over 3000 signatures with over 100 trillion U.S. dollars of assets under management signed up in 2020. And more is yet to come.
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